Italy’s real euro referendum

BOLOGNA — To listen to League leader Matteo Salvini, Italy’s next election will be a “referendum” on whether Italy should be free or enslaved. Given that his efforts to form a government foundered over his insistence on a Euroskeptic finance minister, it’s hard not to read that as a “referendum” on Italy’s eurozone membership.

The good news is, that’s no reason to believe Italians would knowingly vote to leave the common currency area. The bad news is, that might not matter.

Public polling shows most Italians like Europe’s single currency. It also reveals that increasing numbers think it is good for the country, and even larger numbers think it is good for Europe. The euro may not be as popular in Italy as it is in other countries that have adopted it. And Italians may be skeptical about the European Union more generally — with some truly strange polling data that suggests Italians would like to leave the EU but stay inside the euro. But the opinion polls gives us no reason to believe that Italians are hell-bent on staging a vote to bring back the lira.

There are other reasons to be optimistic as well. Italy’s economy has recently been improving, which generally takes some of the sting out of euro criticism. And even the League and its partners in the failed effort to form a government, the anti-establishment 5Star Movement, seem to understand that campaigning to leave the euro is no way to win an election. If they thought differently, they would have done that last March. Instead, they distanced themselves from their most extreme proposals and emphasized other issues instead: migration, security, taxes, a minimum basic income.

But that doesn’t mean officials in Brussels and Frankfurt can breathe easy. Italians may not want to leave the euro but they do want better social services, lower taxes and more generous benefits. And sadly, they lack leaders capable of explaining what the heavily indebted country needs to do to achieve those goals.

Already, fears that Italian voters will elect a Euroskeptic government have caused the country’s cost of borrowing to jump up sharply.

For years, Italy’s ruling class has portrayed painful reforms not as necessary improvements to the economy, but as as impositions from Brussels, done at the behest of distant bureaucrats. What Salvini has done is taken the argument to the extreme: Only by breaking free from European tutelage can Italians have what they want.

That’s where the danger lies. Bond markets aren’t interested in polls of public opinion about the eurozone. If Italian voters seem ready to elect a government that refuses to abide by European commitments, that will create real problems no matter what the political motivation.

Already, fears that Italian voters will elect a Euroskeptic government have caused the country’s cost of borrowing to jump up sharply. It’s not hard to imagine that eventuality causing rating agencies to downgrade Italy’s credit-worthiness below the level where the European Central Bank (ECB) can buy its debt.

As market pressure grows, it will be up to the rest of Europe to decide whether to intervene to keep the country from defaulting. Already, it’s unclear whether there are enough resources to keep Italy from tipping over the edge. And the presence, or risk, of a Euroskeptic government in Rome can only make that process more complicated.

If what happened in Greece is any indication, a populist government will hold out for as long as it can, and only submit to European tutelage when the cost of not doing so has become unbearable. And by then it could be too late.

That’s the scenario investors will be thinking about, amid all the political noise, as Italians prepare to return to the polls. Those owning, or thinking of buying, Italian bonds face a simple binary decision — hold/sell; buy/don’t; yes/no. It’s much like a referendum. If enough tip in the wrong direction, Italy will be in trouble, and so will the eurozone.

The referendum on whether Italy stays in the euro will take place in the markets.

Erik Jones is professor of European studies and international political economy, and director of European and Eurasian studies at the Johns Hopkins School of Advanced International Studies (SAIS), and a senior research fellow at Nuffield College, Oxford.